Edited version of your private ruling

Authorisation Number: 1012542139024

Ruling

Subject: Non Commercial Losses- Extended Lead Time

Question

Will the Commissioner exercise the discretion in paragraphs 35-55(1)(b) or 35-55(1) (c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your nut growing activity in your calculation of assessable income for the income year ended 30 June 2013?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced:

Year ending 30 June 2007

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

· You are a Grower in a nut growing project (the Project) that was expected to makes it first tax profit at the end of the sixth income year of the project.

· The Commissioner previously exercised discretion to allow you to include any losses from your nut growing activity in your calculation of assessable income, up to and including the fifth income year of the project.

· However the Project has been subject to agricultural stress imposed by drought resulting in reduced growth, delayed maturity and biennial cropping.

· At the end of the sixth income year, the actual assessable income has fallen short of the attributable deductions.

· You provided:

o the project documentation;

o an independent expert report; and

o financial results and expectations, that show that the project has made a tax profit at the end of the seventh income year, and is expected to make a tax profit each income year thereafter until the end of the project.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35,

Income Tax Assessment Act 1997 section 35-10,

Income Tax Assessment Act 1997 subsection 35-10(2E),

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 paragraph 35-55(1)(b) and

Income Tax Assessment Act 1997 paragraph 35-55(1)(c).

Reasons for decision

The Project was expected to first produce a tax profit at the end of the sixth income year. Despite business activities having been conducted in a commercially viable manner, the independent expert advised that agricultural stress imposed by drought resulted in reduced growth, delayed maturity and biennial cropping during the lead time. This has caused the Project to suffer a setback, extending the lead time by one year. The Project is now expected to produce a tax profit in the following year, and thereafter for the term of the Project.

A Grower who was accepted into the Project on 1 July 2007 and carries on a business of nut growing individually (alone or in partnership) and is (or has) expected to incur losses from their participation in the Project for the sixth income year which will be subject to Division 35. These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year.

The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non commercial business losses: Commissioner's discretion when exercising the discretion.

In the 2009-10 income year, an income requirement was introduced to Division 35 which applies to Growers in this Project. Where a Grower with income for NCL purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the Scheme described in this Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that:

· it is because of its nature that the business activity of the Grower will not satisfy one of the four tests in Division 35; and

· there is an objective expectation that within a period that is commercially viable for the nut growing industry, the Grower's business activity will satisfy one of the four tests set out in Division 35 or produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

For the sixth income year of the Project, where a Grower with income for NCL purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that:

· it is because of its nature that the business activity of the Grower will not produce assessable income greater than the deductions attributable to it; and

· there is an objective expectation that within a period that is commercially viable for the nut growing industry, the Grower's business activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000:

· taxable income for that year (ignoring any loss arising from participation in the Project or any other business activity);

· total reportable fringe benefits for that year;

· reportable superannuation contributions for that year; and

· total net investment losses for that year.

Due to conditions that were outside the control of the operator of the business, the lead time of the business activity has been extended. In accordance with Taxation Ruling TR 2007/6, specifically Example 10 at paragraphs 141-151, it is considered that inherent characteristics have prevented the Growers from satisfying a test, or producing assessable income greater than the deductions attributable to it, in the 2012-13 income year. As such, the business activity meets the requirements of subparagraph 35-55(1)(b)(i) or subparagraph 35-55(1)(c)(i).

To satisfy the requirements of subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii) there needs to be an objective expectation that the business activity will satisfy a test or make a tax profit within a period that is commercially viable for the industry concerned.

The information from the independent expert report and the actual and projected financial statements, provides evidence to supports a conclusion that there is an objective expectation that the project is commercially viable. The business activity will have its first profitable year in the 2013-14 income year and therefore make a tax profit in that year, which will occur within the period referred to in subparagraph 35-55(1)(b)(ii) or subparagraph 35-55(1)(c)(ii).

In this case the Commissioner's discretion would be exercised for the sixth income year of the Project, as it would be unreasonable to apply the loss deferral rule.

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